I logged into my bank account this morning to pay some bills as well as make some transfers. Then I started to think… We often hear people say that we have to save both for short-term rainy days as well as our golden years when we may not have as much earning potential as we did when we were younger. However, many of us are in debt. This has to be one of the most severely indebted generations in American history. So how do we decide what to prioritize? If you’re wondering how you can possibly save when you have creditors breathing down your neck, I have to say you are certainly not the first to wonder that. I asked myself the same question in the past, which has allowed me to come up with a system that makes sense.

It all comes down to balance, common sense and some basic math.

Many people who find themselves in debt, are in that position because they indulge. But that’s not representative of everyone. Some people simply live paycheck to paycheck and a minor emergency subsequently morphs into a gremlin they can’t control. A bad flu landed them in the hospital with a high co-pay, a busted transmission on a car that was paid with a credit card, a broken AC system, can all conspire to derail even the most disciplined.

This means, your first step is to eliminate one of the primary sources of sudden insurmountable debt. If you had a leak in your house, would you start mopping up the water before plugging the hole? Because you can mop all you want, but if you don’t take care of the source, you’ll be mopping every time it rains. The best way to tackle that is to have a decent emergency fund. That will mean you’re prepared to pay for an emergency withouthaving to charge your credit card. Some people recommend 3-6 months of living expenses, others have said 8-12 months. I think it depends on your personal situation but I’m a fan of the 6-month guidance if you have a spouse, and if you are single and on your own with no one to help contribute to your salary, I’d say err on the side of caution and have 9 months stocked away. Of course, you’re not going to accumulate that quickly, but it’s ok to take your time. What matters is that you’re working towards it.

Next, pay your debts, and do it aggressively. For example, my student loans are $400/month, but I pay $800. The extra $400 gets applied directly to my principal, shortening my payment period and reducing the amount I have to pay interest on. If something happens (i.e. breaking my dishwasher and paying $500 for a new one), I can choose to not pay the extra $400 for the month I have the unexpected expense. I make sure the minimum amount is on auto-pay, and the remainder is paid at my convenience. The more you pay, the shorter your payment term and the less it costs you in the long run, helping you get out of debt faster and cheaper.

Finally you can start saving! Why is saving for non-emergencies dead last on the list? Think about the interest rates banks are paying us these days. In fact, think about the BEST advertised rate you’ve seen in recent weeks or months. What was it, 1%? Maybe 2%? What sense does it make for me to save at 1.5% and not paying my loans which are costing me 5.9%? I’m actually losing 4.4% overall. It really makes no fiscal sense. I already have an emergency fund, a home, and two solid cars. This means, anything I save beyond is money I’m not paying my debt with.